According to Atradius, 43.8% of Australian business-to-business (B2B) sales are made on credit and nearly half of such credit sales are paid after the due date. In addition, Sage reported that Australian small and medium enterprises (SMEs) spend an average of 5 days and nearly $5000 chasing late payments only to write off 7% of them as bad debt. This can, understandably, have a massive impact on SMEs. So we put together this post to highlight some of the most common factors that contribute to businesses paying after the due date and provide tips for how SMEs can manage late payments.
Factors that contribute to late payment
Most SMEs operate with tight budgets and limited resources. This often means businesses allocate the majority of their resources to closing deals with processes for collecting payments and chasing late payments becoming an afterthought.
In addition, SMEs usually don’t have the resources required to take legal action against businesses that don’t pay invoices by the due date. This leaves SMEs vulnerable to businesses that will choose to pay late purely because they know they can do so without suffering any repercussions.
Similarly, larger enterprises often develop set payment processes and have the power to refuse to pay earlier even if they’re required to do so by an SME’s credit terms. Most SMEs are then forced to accept late payments unless they’re willing to seek alternative customers.
Reputation and relationships
Even if SMEs do have sufficient resources to take action against organisations that don’t pay by the due date, many fear doing so will jeopardise their relationship with those customers. SMEs are particularly cognisant of the fact that keeping customers happy is crucial to maintaining long-term financial relationships. And many SMEs believe that taking action on late payments will result in customers taking offence and seeking alternative suppliers.
On top of that, SMEs also worry that chasing late payments may be seen by customers as a sign of unhealthy cash flow. They think customers will assume that businesses chasing late payments do so because they don’t have any other way to pay their expenses. And they worry that customers that assume that will become concerned that the SME will be unable to provide the required products and/or services in the future leading them to seek a more stable alternative supplier.
How to Manage Late Payments
Working with government and Australia’s biggest businesses
The government now requires the largest 3000 Australian businesses to commit to paying small businesses within 20 days if they want to tender for federal contracts. The Prime Minister has also committed to reducing the government’s payment times from 30 to 20 days for invoices under $1 million by July this year.
Businesses seeking large customers can take advantage of these policy decisions by tendering for government contracts, taking action to be added to government ‘supplier panels’ and developing relationships with large businesses that tender for government contracts. When developing relationships with other businesses, these policy changes may also be useful bargaining chips.
Implement late payment fees and/or pay-on-time incentives
One of the simplest ways to decrease late payments is to charge interest on overdue fees. Some businesses will be willing to pay the interest but others will make an effort to pay on time when faced with a late payment fee.
Similarly, providing a discount or other incentive to pay on time can encourage businesses to pay invoices by the due date.
Sell unpaid invoices
When businesses still pay late despite the above measures, SMEs can sell unpaid invoices. This means SMEs can gain access to capital that’s tied up in accounts receivables as and when required without hassling the customer. This process is called invoice trading and is categorised as ‘invoice finance’.
SMEs seeking invoice finance have the option of alerting customers to the sale of their invoice. Alternatively, where damage to a business relationship is a concern, SMEs can choose a confidential invoice trading solution that means the customer will never know their invoice was sold.
Invoice finance can be provided by a traditional lender or one of the new generation peer-to-peer service providers. Invoice trading with the latter attracts minimal fees, requires no collateral other than the invoice itself, and can provide funds in under 24h. Invoice finance can be a great tool to help manage late payments, allowing you to stay on top of your cash flow.